Educational Articles

Dow 30 Earnings: Caterpillar Inc. - First Quarter 2011

Jerry W. Gray, Jr.
| April 29, 2011

Earthmoving equipment maker Caterpillar (CAT - Free Caterpillar Stock Report) reported strong first-quarter results. Rising global demand for the company's products and a focus on cost management helped to drive earnings per share to an all-time high of $1.84 in the March term. Sales of $12.949 billion were up 57% from $8.238 billion in the year-earlier period. Both of these measures far exceeded our estimates of $1.20 a share and $10.350 billion, respectively.

Sales growth was inclusive for all geographic regions and operating segments, thanks largely to stronger demand for new equipment. In developed countries, despite a continued weak level of construction activity, the top line increased as a result of customers upgrading machine fleets and replacing older equipment. Construction activity has been strong in the developing world, however, and has led to record machine sales in those countries.

Looking ahead, Caterpillar is estimating 2011 sales and share earnings of roughly $52 billion-$54 billion and $6.25-$6.75 a share, respectively. If the company meets even the bottom end of management's guidance ranges, Caterpillar will have achieved top- and bottom-line records. However, the outlook does not include the acquisitions of MWM Holding or Bucyrus International, because they have not yet closed.

Although our estimates for 2011 have increased, the improvements would have been even greater if not for the impact of the tragic natural disasters in Japan. While Caterpillar's facilities in that island nation were not damaged, many of its suppliers were affected. As a result, the company is experiencing sporadic production disruptions at many of its plants around the world. These disruptions are liable to hurt sales and factory efficiency and drive up costs, particularly during the second quarter. For the year, the disasters ought to reduce sales by $300 million and operating profit by about $100 million.

In the long term, the ongoing economic expansion should boost demand for mining and construction equipment. As a result, we are optimistic about Caterpillar's prospects to 2014-2016. That said, the price of these shares has risen sharply in past few months, and we believe that the stock offers limited capital gains potential at the recent quotation.

About The Company:Caterpillar Incorporated is the world’s largest producer of earthmoving equipment. Major global markets include road building, mining, logging, agriculture, petroleum, and general construction. Products include tractors, scrapers, graders, compactors, loaders, off-highway truck engines, and pipelayers. Also makes diesel & turbine engines and lift trucks. Foreign sales made up about 68% of the company’s total in 2010.

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.